sovereign bonds - All posts tagged sovereign bonds

Argentina may still be holding 11th-hour negotiations with holdout bondholders to try to prevent another debt default, but Standard & Poor’s has apparently run out of patience. The rating agency just cut Argentina’s long- and short-term foreign currency sovereign credit ratings from the lower tiers of junk down to “selective default” – or “SD” – which in S&P’s words indicates that “Argentina defaulted on some of its foreign currency obligations.” This all traces back to a recent U.S. court order that prevents Argentina from paying bondholders who accepted a restructuring deal following the country’s 2001 default unless it concurrently starts to pay a small group of holdout bondholders too.

More from S&P:

On June 30, 2014, Argentina failed to make a US$539 million interest payment on its Discount Bonds maturing in December 2033. Under the terms of the Discount Bonds, Argentina had a 30-day grace period following the June 30 scheduled interest payment date to make payment.

Standard & Poor’s defines “default” to include instances where either scheduled debt service is not paid on the due date or an offer of new replacement debt contains terms that are less favorable than those of the debt being replaced. Our interpretation of an issuer meeting its financial commitments “as they come due” is that investors are paid in full and on time, failing which we lower the rating on the relevant rated issue(s) to ‘D’ and we downgrade the issuer to ‘SD’.

S&P said the foreign currency sovereign credit ratings will remain at ‘SD’ until Argentina cures its payment default, saying “if and when” Argentina did so S&P would reassess Argentina’s general credit standing, “most likely raising the foreign currency rating to the triple ‘C’ or low ‘B’ categories.” S&P also affirmed Argentina’s existing local currency ratings, which are deep in junk territory, to reflect S&P’s view that “the potential disruptions to interest payments on Argentina’s external debt are not likely to further erode its ability to service its debt issued in its local currency and under its local law.”

Treasury yields are higher Wednesday morning after payroll services firm ADPreported that the U.S. added 281,000 private-sector jobs in June, beating consensus expectations and up from 179,000 in May and 220,000 in April. The report is seen as a hint of what we might get when the Labor Department releases its June nonfarm payroll tomorrow morning (that report is usually issued on the first Friday of each month but moves up a day because of the July 4 holiday).

The 10-year Treasury note is down 10/32 in price today, lifting its yield to 2.601%, the first time in over a week that it’s risen above 2.6%. The 30-year bond is down 25/32 to yield 3.439%.

The monthly Labor Department figure has been running around 200,000, and the ADP number could mean we’re in for an improvement in tomorrow’s numbers, which is what a lot of economists have been expecting: better economic data now that the excuse of lousy winter weather is well behind us.

“It is more and more difficult for the bears to find indicators that don’t show an acceleration in growth,” writes Torsten Slok, chief international economist at Deutsche Bank Securities, this morning. “I think we are getting closer to the non-linear inflection point when fixed income markets suddenly will realize that the recovery is real.”

That kind of real recover still might not be enough to put a big dent in Treasury bond prices, with improving domestic economic data (which should push yields higher) being offset by capital inflows from Europe and other regions where government bond yields are even more depressed than Treasury yields.

Bloomberg’s Susanne Walker is out with a story today painting a macroeconomic backdrop that’s sure to be an ongoing boon for bonds, namely that the global supply of bonds will fall short of global demand by $460 billion this year, continuing to boost bond prices worldwide. From her story:

Debt issued by sovereign, corporate and other borrowers will decline by $600 billion to a net $1.8 trillion in 2014, as demand reaches $2.26 trillion, according to New York-based JPMorgan Chase & Co., the world’s biggest corporate bond underwriter. Demand has pushed down average bond yields to levels unseen since May 2013 as economies slow, borrowing is reduced and central banks signal no rush to start raising interest rates anytime soon.

The imbalance helps explain why most forecasters have gotten it wrong this year when predicting bond prices and yields. The market received a boost on June 5 when the European Central Bank became the first major central bank to charge fees on deposits and unveiled other plans to support an economy threatened by deflation.

The lack of available supply is one of several forces that’s kept U.S. bond yields – which move inversely to prices – from rising this year, along with abysmal first-quarter U.S. economic growth and even-more-paltry yields on European and Japanese bonds.

The Finance Ministry said it pulled the sale due to unfavorable market conditions, according to a statement on its website today. The yield on Russia’s ruble debt due February 2027 surged 52 basis points yesterday to the highest since June 2012. It declined 17 basis points to 8.71 percent as of 3:51 p.m. in Moscow after President Vladimir Putin said there’s no immediate need to send troops to Ukraine….

The ruble was the worst-performing currency worldwide yesterday after troops took control of the Crimean peninsula, where Russia keeps its Black Sea fleet, amid escalating tensions in Ukraine. The Finance Ministry axed bond sales ahead of schedule on Jan. 28 and Feb. 4 as appetite for developing-nation assets soured after the Federal Reserve cut monetary stimulus. The ministry canceled debt sales on the day of the auction Feb. 19.

Maybe investors will think twice the next time some institution comes around offering a 100-year bond.

If the prospect of locking up your money for longer than you’ll be alive wasn’t already daunting enough, the recent performance of some these so-called century bonds should certainly give you pause. Take JC Penney‘s (JCP) century bonds, issued in 1997 and seen trading most recently at 71 cents on the dollar, per online trading platform MarketAxess. Seemed like a perfectly stable retailer a decade and a half ago. Now it’s not, and bondholders still have 84 years to find out how big a mistake they’ve made.

Or take Mexico. On paper, a sovereign country seems somehow more stable than a clothing retailer, but that doesn’t mean its long-dated bonds are immune to problems or losses. Bloomberg’s Ben Bain reports today that the hundred-year bonds Mexico issued three years ago have been among the casualties of this summer’s broad-based bond selloff, with yields surging by 1.16 percentage points during the past four months as the bonds showcased a severe case of interest-rate risk:

Mexico’s bonds due 2110 have plunged 21.2 cents since Fed Chairman Ben S. Bernanke said on May 22 that policy makers may taper their monthly asset purchases of $85 billion. On a total return basis, the 17.4 percent decline was the most among investment-grade sovereign notes maturing in 30 years or more, according to data compiled by Bloomberg. At 92.94 cents on the dollar, the 100-year bonds currently trade below their issue price of 94.276 cents and yield 6.19 percent.

While Mexico locked in a fixed rate of 5.75 percent annually to borrow $2.7 billion for a century, bondholders have been blindsided by a jump in Treasury yields spurred by concern the Fed will curb its bond-buying program as soon as today. The correlation between the 30-year U.S. notes and the 100-year bonds reached an all-time high this month. Modified duration, which measures a bond’s sensitivity to rate changes, was 16 for Mexico’s 100-year notes, compared with 13.8 for Brazil’s longest-dated dollar-denominated notes, which mature in 2041.

“The speed with which U.S. rates have come up makes Mexico’s decision to issue look so much better,” Joe Kogan, head of emerging-market strategy at Scotiabank, said by phone from New York. “Bad for investors, but certainly Mexico seems to have found the right time to issue such a long-duration bond and lock in rates.”

To be fair, such bonds are more often the territory of insurance companies and large institutions – most mom & pop investors wouldn’t have reason to go near century bonds in the first place.

With so much focus on the Federal Reserve over the past few month, it’s easy to forget how recently global markets were almost entirely dependent on day-to-day news coming out of Europe. So it’s worth checking in on some mixed bond news across the water this morning. First, a rise in investor confidence in Germany pushed German 10-year bond yields to a seven-week high 1.78%, per Bloomberg, the highest level seen in seven weeks. At the same time, spreads on Italian and Spanish bonds over comparable German bonds fell to a two-year low on sentiment that the euro-zone economy is returning to growth, as Bloomberg’s Andrew Frye and Emma Charlton report:

Reducing borrowing costs has been a priority for Italy and Spain after concern that the two nations would struggle to curb their debts pushed yields toward levels that led Greece, Ireland and Portugal to ask for international aid. Recessions in Italy and Spain eased last quarter, while analysts predict a euro-area report tomorrow will show gross domestic product in the region expanded for the first time since 2011….

Italy’s 10-year yield was little changed at 4.16 percent as of 11:46 a.m. in Rome, while benchmark German rates climbed seven basis points to 1.77 percent, narrowing the difference between the two to 239 basis points, the least since July 22, 2011. The spread widened to a euro-era record of 575 basis points on Nov. 9, 2011.

Spain’s yield gap over Germany slid eight basis points to 270 basis points, the tightest since Aug. 17, 2011. It surged to 650 basis points in July last year on speculation the debts of the nation’s banks and regions would prompt the country to seek a bailout.

Steven Wieting, global chief investment strategist at Citi Private Bank, says the current pause in the bond market rout provides investors with “a window of time to prepare portfolios for a more challenging fixed income environment in the years ahead.” More from Citi:

Five years after the largest banking and credit shock of the modern era, interest rates are still exceptionally low by historic standards. In our view, an eventual return to merely “normal” interest rate levels will represent a huge portfolio challenge for investors for years to come, even if the adjustment process is gradual and intermittent….

Fixed income returns were strong in recent years on price appreciation, despite already low yields for much of the period. Over the past five years, the U.S. investment grade universe has produced a 5.8% annualized total return with yields averaging 2.8%. Thus, the slight majority of total return was generated with “bond price inflation,” not income. Such performance boosts reverse in a period of rising rates.

Citi says mainstream bond investors for years have relied on steady, if modest, returns, but have not expected losses, and for that reason bonds are often held in portfolios with greater leverage than stocks, which can magnify losses in a downturn. Citi expects 10-year U.S. Treasury yields in a range of 3% – 3 1/4% a year from now, implying a slight negative total return over that time frame “with more such weak returns to follow.” If the 10-year yield rose to 4% within two years, the annual nominal return would be -1.5%, or about -3.5% when adjusted for inflation. More from Citi:

We believe pension funds have adjusted to a low conventional yield environment in part by shifting to alternative investments with higher potential returns at the cost of lower market liquidity. If, as we expect, a rise in interest rates is gradual and prolonged, the same strategy should still make sense for other investors….

The high price of bonds is likely to be a lasting drag on even well balanced investment portfolios, even if any rise in rates is prolonged and muted. Within the conventional bond market allocations of the Global Investment Committee, we expect to remain underweight until bond prices are lower and returns are higher. The share of income in the portfolio is likely to be driven to a greater extent by stock dividends, real estate-related assets and some hedge funds (such as distressed credit investors, and those that have constructed a floating or negative duration exposure).

Diversification and risk management will never suggest a zero weighting in bonds. But investors need not follow “forced” institutional buyers into historically low yields at average historical portfolio weightings.

Barlcays today cautions that the interest-rate risk in high-grade bonds might not be worth the paltry returns it sees ahead:

[W]e believe safe-haven bonds are likely to generate negative risk- and inflation-adjusted returns over the coming years and we retain our underweight rating on global governments… We agree with our rates strategists that rallies, particularly in the US, should be used as opportunities to reduce exposure. However, we retain our ‘risk barbell’ by recommending investors use the 5y US Treasury as a hedge against global equity exposure on the notion that a less favourable economic outlook should be associated with a lower probability of policy rate tightening.

Barclays does see value in corporate bonds after they’ve cheapened over the past two months in sympathy with rising rates without seeing much compression in credit spreads:

Where our expectations have not been met is in the behaviour of corporate spreads in response to a rising US rate environment. Our expectation, like that of our credit strategists, was that credit would likely generate negative total returns in a rising interest rate environment, but we looked for spreads to tighten so long as higher interest rates were driven by a fundamental improvement in the economy and not inflation. This was particularly true in the high yield market, where improving economic fundamentals would support a stronger outlook for credit risk, whereas investment grade credit is likely to be more sensitive to a move in Treasury rates.

Investment grade spreads did initially rally, tightening about 5bp from May 1 to May 29. Subsequently, spreads on investment grade debt gradually widened out to 150bp in late June. High yield debt followed a similar pattern, first narrowing and then widening about 100bp to 506bp in late June. This spread widening is at odds with historical precedents [in which] for every 1bp Treasury yields move higher, high yield spreads should tighten by 1bp. Given that outflows from high yield funds have eased and volatility in the US rates market has died down somewhat after the Fed tied the conclusion of asset purchases to the unemployment rate reaching 7.0%, we feel more comfortable expecting further spread compression in US high yield credit… As a result, we move our underweight in high yield credit to neutral, while preserving our underweight in investment grade credit.

It’s another bad day for peripheral euro-zone sovereign debt, led again by losses in Portuguese bonds. Bloomberg’s Emma Charlton and Eshe Nelson report:

Ten-year Portuguese yields climbed toward the highest since November after the nation’s debt agency said it would sell bonds regularly should market conditions be conducive. German, French and Dutch bonds advanced after European Central Bank Executive Board member Vitor Constancio said euro-region monetary policy would stay accommodative. Ireland’s 10-year yields dropped the most in a week after Standard & Poor’s raised its outlook for the nation’s debt rating to positive.

“Portugal is being sold on the back of the political commentary,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “There doesn’t seem to be a lot of common ground between the parties and with a small bond market like Portugal, the move gets exaggerated.”

Portuguese 10-year yield climbed 61 basis points, or 0.61 percentage point, to 7.51 percent at 4:54 p.m. London time, after rising to 8.11 percent on July 3, the highest level since Nov. 21. The rate has averaged 7.38 percent in the past year. The 4.95 percent security maturing in October 2023 fell 3.845, or 38.45 euros per 1,000-euro ($1,305) face amount, to 82.09. Two-year note yields rose 58 basis points to 5.78 percent.

Last week Portuguese bond yields had risen after the country’s foreign minister and finance minister both resigned over a two-day span.

The attention of bond markets is being drawn to Europe again Wednesday, after the surprise resignation of Portugal’s finance minister Vitor Gaspar yesterday and its foreign minister Paulo Portas today. Ed Ballard reports in today’s Wall Street Journal:

Midmorning in Europe, Portuguese 10-year bond yields were up 1.4 percentage points at 7.87% amid fears Mr. Portas’s party will withdraw its support for the government. Yields pushed higher in other financially stressed euro-zone countries as fears of contagion grew. Bond yields rise as prices drop.

“The political problems increase the uncertainty surrounding Portugal’s bailout commitments and potentially even the prospect for negotiations of a precautionary program succeeding the current program running out in May next year,” RBC said in a note to clients. “We see the risk of further spillover effects into Spanish bonds and Italian bonds hampering the recent recovery.”

Elsewhere in Europe, yields on Italian 10-year bonds rose by 0.15 percentage point to 4.549%, while Greek bonds were quoted up 0.4 percentage point at 11.339%. Back stateside, Treasury yields are mostly unchanged, with the 10-year note yielding 2.47%, according to Tradeweb data.